Investor's Eye: Update - Cadila Healthcare (Near-term opportunity shrinks in USA; long-term prospects remain strong ), Telecommunications (Receding regulatory concerns and easing competitive environment)

 

Investor's Eye [July 02, 2013]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE Cadila Healthcare Recommendation: Buy Price target: Rs906 Current market price: Rs773 Near-term opportunity shrinks in USA; long-term prospects remain strong  Key points Adverse outcome of patent litigation on Prevacid ODT shrinks short-term prospects in USA: Japan's Takeda Pharmaceutical (Takeda) won a patent infringement suit against Zydus Pharmaceuticals (US subsidiary of Cadila Healthcare) after proving to a New Jersey federal judge that Zydus Pharmaceuticals' (USA) proposed generic gastric relief product would unfairly compete with Takeda's Prevacid SoluTab (Prevacid ODT) medication. Takeda had sued Cadila Healthcare on filing for generic Prevacid ODT. Prevacid ODT is used to treat gastric ulcers and its market size is estimated to be $300 million. It was expected to have three to four competitors after patent expiry/invalidity. Zydus Cadila is one of the litigants who seek to get generic entry before the patent expiry on May 17, 2017 (patent number 6328994). Prevacid ODT could provide a low competition opportunity for Zydus Cadila. This potentially limits the short-term opportunity in the US market for Cadila Healthcare, which could give nearly $80-100 million revenues under market exclusivity. Long-term opportunity remains intact; complex generics to ensure better market share: Cadila Healthcare has recorded a slower growth during the recent quarters due to price erosion in plain generics and lack of new approvals. Though we do not see a big trigger in the US market in near future, the long-term prospects remain strong on account of complex generics and technology-intensive products like transdermal products, vaccines, injectibles, nasal sprays and biosimilars. However, a surge in the US business would be visible only in FY2015, when some key approvals are likely to come. We estimate the US revenues to jump from $283 million in FY2013 to $340 million in FY2014 and $425 million in FY2015. Ex-US business is doing fine; India, emerging markets to support the near-term growth: The near-term growth for the company is likely to come from the Indian formulation business (despite the new pricing policy impacting the revenues, we expect better than industry growth rate in FY2014), Zydus Wellness (consumer business), emerging markets and some of the joint ventures. We expect the revenues and profit compounded annual growth rate (CAGR) of 17% and 39% over FY2013-15E respectively. We maintain estimate, recommendation and price target: Despite a short-term disappointment, we keep our earnings estimate intact and maintain Buy recommendation on the stock with a price target of Rs906 (implies 17x average earnings for FY2014 and FY2015). SECTOR UPDATE Telecommunications Receding regulatory concerns and easing competitive environment Key regulatory developments Reduction in roaming rates As opposed to the earlier concern that the national roaming charges would be totally eradicated and roaming would be free for subscribers, the Telecom Regulatory Authority of India (TRAI) adopted a balanced approach and has reduced ceilings for national roaming calls and SMS, and has also given flexibility to the players to partially offset the same via special tariff vouchers (STV) and combo vouchers. Our take: We believe the TRAI's policy of reducing the ceiling on roaming compared with earlier envisaged free roaming is a balanced approach as it achieves the twin objectives of benefiting the consumers and also safeguards the operator's interest. EGoM refers spectrum pricing back to TRAI After the two rounds of spectrum auctions, which received muted response (March 2013 auction received no bids for the 1800MHz and 900MHz spectrum), the recent development whereby the Empowered Group of Ministers (EGoM) has again referred spectrum pricing back to TRAI gives us the belief that the 2G spectrum prices would be lowered again in order to attract the players and make their business case viable. Our take: We believe the licences of Bharti, Vodafone and Idea would come up for renewal starting FY2014 onwards and a reduction in the spectrum payout would augur well for the players. Key business developments Steep cut in the 2G data rates by operators The data contribution to overall revenues has seen a substantial improvement and currently stands in the range of 7-9% for the operators. In an attempt to further increase the data usage and bring elasticity, the players have slashed their data tariffs in selective circles by 70-80%, which we believe will reflect in the contribution and overall revenues going forward. Outlook and valuation Improving domestic environment: The recent months have witnessed a substantial decline in the competitive intensity providing the telecom players with an elbow room to increase tariffs and reduce discount and freebies. We believe that the era of cut-throat tariff war is over. Thus, the telecom companies should witness a gradual return of pricing power.  Positive on telecom: Despite improving domestic fundamentals and a decent growth upside from the voice and data opportunity, the Indian telecom players are trading in the range of 7-7.5x their one-year forward EV/EBITDA. Thus, we maintain our medium- to long-term positive bias on the sector and prefer Bharti and Idea in the Indian telecom space, though Q1FY2014 performance for Bharti as well as Idea would be impacted by forex fluctuations. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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